Despite A Pristine Q4, Stifel Downgrades VMWare On Overhang From Parent Dell Technologies (NYSE:DVMT)

VMware, Inc. VMW reported fourth-quarter results after the close Thursday, with 14-percent revenue growth, 20-percent license revenue growth and an 18-percent increase in non-GAAP earnings per share.

Notwithstanding the stellar results, the stock reacted with a steep move to the downside.

The Analyst

Stifel analyst Brad Reback downgraded VMware from Buy to Hold and lowered the price target from $152 to $135.

The Thesis

VMware, despite forecast-beating results, is likely to be weighed down by the ongoing overhang from "potential business opportunities" being evaluated by parent company Dell Technologies Inc DVMT and the impact it will likely have on the company, Reback said in a Thursday note.

The earnings beat came about due to top-line upside and the leverage in the model, the analyst said. Cash flow from operations and free cash flow also exceeded estimates, he said. 

"VMware delivered solid growth across products and geographies along with continued commentary around a healthy spending environment as organizations undergo digital transformation to drive agility," Reback said. 

Stifel said it believes VMware's results along with secular tailwinds continue to bode well for Oracle Corporation ORCL and Red Hat Inc RHT when they report February quarter-end earnings in a few weeks.

VMware's positive commentary about hybrid cloud is a plus for Microsoft Corporation MSFT, given its strong hybrid cloud portfolio, Reback said. 

The Price Action

VMware shares were up about 36 percent over the past year up until Thursday.

At the time of writing, the shares were slipping 5.4 percent to $116.98. 

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